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Provinces, feds to debate proposed changes to ever-divisive equalization program

December 7, 2017 - 10:45am

OTTAWA — A decades-old sore spot in the Canadian federation is days away from another flare-up as the country's finance ministers prepare to discuss potential tweaks to the formula behind equalization payments.

British Columbia Finance Minister Carole James said in an interview that the federal government is proposing a change to include non-residential property values as part of the complex calculation.

The adjustment would likely make it more difficult for provinces with property values well above the national average — such as B.C. and Ontario — to qualify as recipients of equalization payments from Ottawa.

Equalization is designed to help poorer provincial governments provide public services that are reasonably comparable to those in other provinces. The program is coming due for its twice-a-decade update before the 2019-20 fiscal year — and since it's a federal program, Ottawa can make unilateral changes.

Historically, equalization has been a source of conflict between governments within the federation.

Under the current formula, the provinces that received shares of this year's $18-billion equalization envelope — the so-called "have-not" provinces — included Quebec, Manitoba, Nova Scotia, New Brunswick Prince Edward Island and Ontario. Quebec easily took in the largest share in 2017-18 at $11 billion.

The other provinces — B.C., Alberta, Saskatchewan and Newfoundland and Labrador — did not receive anything through the constitutionally guaranteed equalization program.

The B.C. government warns that going forward the inclusion of non-residential property values in the formula would make it more difficult for the province to qualify for payments in the event of an economic downturn.

The issue is a top concern for James ahead of meetings Sunday and Monday in Ottawa with her federal, provincial and territorial counterparts.

"We certainly don't agree with that direction — we've seen no research that has shown that it makes sense to change the weighting in the equalization payments," James told The Canadian Press.

"I'll certainly be standing up for our province ... and telling the federal minister of finance that these aren't acceptable changes."

James said the update would mean the formula would deem B.C. to have untapped capacity to generate additional property tax revenue. She argued it's based on the assumption B.C. municipalities could raise tax rates on properties, which have seen their values soar in recent years.

To determine whether a province qualifies for an equalization payment, and for how much, the formula measures each province's ability to raise revenues, or their fiscal capacity.

James wants Ottawa to make sure the short- and long-term impacts for all provinces have been explored before it moves forward.

With the renewal of the equalization formula scheduled for 2019, this weekend's meeting will likely be the first of many federal-provincial discussions on the matter.

B.C. isn't the only province with concerns about the proposal.

"When it comes to the potential of generating more revenue from the high prices of real estate, which is what British Columbia is arguing, we don't have the capacity to squeeze out more money from the system," Ontario Finance Minister Charles Sousa said in an interview.

Sousa said his province has lowered its revenue expectations for the real estate sector after the introduction of measures to cool red-hot markets, such as the Toronto region.

"So, I agree with British Columbia that we can't basically assess certain real estate valuations as a means to assess equalization payments," he said.

Ontario has been receiving equalization payments since 2009 as a have-not province. But after improvements to its economy in recent years, the province is expected to return to "have" status some time in the next couple of years.

A senior Ontario government official, who spoke on condition of anonymity because of the sensitivity of the issue, said the proposed change could be the difference between whether it collects equalization or not.

"Our concern is that if the last years taught us anything, it's that property values are volatile in both British Columbia and in Ontario," said the official, who would prefer a phased-in approach.

"We would rather have it dealt with in a more tempered way, rather than just jumping right off the cliff on it."

Chloe Luciani-Girouard, a spokeswoman for federal Finance Minister Bill Morneau, wrote in an email Thursday that Ottawa will always listen to the concerns of provinces and territories — and will take them "very seriously."

The future of the equalization formula will also be a priority for Newfoundland and Labrador at the meetings.

The province's economy, hit hard in recent years by the commodity slump, still failed to qualify for equalization payments this year and Finance Minister Tom Osborne doesn't expect it to next year, either.

Osborne said in an interview that the current formula only addresses revenue and doesn't account for the different costs of services between provinces.

He says his province, with its small, dispersed population, faces the highest costs of services in Canada — and they're growing at an "unsustainable" clip.

Osborne plans to push his counterparts on the issue in hope of changing the formula so that it reflects both revenue and expenditures.

"If anybody can explain to me how we're a have-province, I'd like to hear it, because we're certainly not a have-province," he said.

The formula is also based on a three-year moving average of economic growth, so a province's have- or have-not status can lag economy-altering events.

The country's finance ministers will discuss a range of issues during the meetings — from cannabis taxation, to the three-year review of the Canada Pension Plan, to the state of the global economy. The ministers are also scheduled to meet Bank of Canada governor Stephen Poloz.

Ahead of the meetings, Morneau will distribute updated figures outlining how much the neediest provinces can expect to receive from Ottawa in the next fiscal year, 2018-19.